Uppal Estate v. The King, 2025 TCC 34
According to subsection 53(1) of the Tax Court of Canada Rules (General Procedure), the Tax Court of Canada (“TCC”) can “strike out or expunge all or part of a pleading or other document with or without leave to amend…” on it’s own or upon application by a party to the respective appeal. The decision in The Estate of the Late Paul Uppal v. His Majesty the King, 2025 TCC 34 [Uppal] involved motions by the Appellant to strike pleadings of alternative assumptions of fact and penalties in the Respondent’s amended Notice of Reply.
Canada Revenue Agency (“CRA”) carries out the operations of the Respondent, the Minister of National Revenue (the “Minister”). Notably, when assessing tax the CRA can make factual assumptions. In practice, CRA does not initially have to prove the facts they rely upon to assess a tax liability. The burden of proof is only tested in Tax Court and not prior during the tax assessment and internal appeal (Notice of Objection), both administrative processes. In general, the Minister’s Notice of Reply, filed in response to a taxpayer’s Notice of Appeal to the Tax Court of Canada, will contain specifically referenced factual assumptions relied upon by the Minister/CRA in the making the respective assessment. The onus is on the Appellant to “demolish” the assumptions at which point the Minister must prove the respective facts.
The decision in Uppal confirmed two rules: (i) the Minister cannot add assumptions of fact that are inconsistent with the Minister’s primary assessment position; and (ii) the Minister cannot ask the TCC to apply penalties that were not originally assessed.
Background
The Minister alleged that the Appellant, the estate of the late Paul Uppal, failed to report income from the sale of shares of Ranger Gold Corp (“Ranger”). Mr. Uppal held legal title to a number of Ranger shares. Chambord Media Inc. (“Chambord”), a corporation, also held legal title to other Ranger shares. The Minister, the Respondent, assumed that Mr. Uppal was the sole shareholder of Chambord.
The Minister’s primary assessing position was that Mr. Uppal was the beneficial owner of both the shares registered in his name and the shares registered in the name of Chambord. The Minister’s alternative position was that Chambord was the beneficial owner of the shares registered in its name.
The Respondent also pleaded that the taxpayer should be liable for penalties for failing to file T1134/T1135 forms, even though only gross negligence penalties had been assessed.
The Appellant moved to strike the Respondent’s alternative assumptions. Either Mr. Uppal was the beneficial owner of the shares held by Chambord or Chambord was the beneficial owner of those shares. According to the Appellant, since both could not be correct the Respondent could not plead assumptions in the alternative.
The Appellant also sought to strike the alternative penalty pleadings on the ground that the Crown was asking TCC to apply penalties that were not assessed by the Minister.
Issues
The main issues were:
- Could the Respondent plead alternative assumptions of fact that were inconsistent with the Minister’s primary assessing position; and
- Whether the Respondent could ask TCC to impose penalties that had not been assessed by the Minister.
Analysis
(1) Alternative Assumptions
The motion judge held, at para. 3 of Uppal, that:
[3] As set out by the Federal Court of Appeal in [Canada v. Loewen (F.C.A.), 2004 FCA 146], the Respondent cannot plead assumptions in the alternative. The Respondent may plead factual and legal arguments that are inconsistent with the basis of the assessment but must do so elsewhere in the Reply.
The motion judge determined that the Respondent pled the assumptions of fact incorrectly. The alternative position that Chambord beneficially owned some of the shares was inconsistent with the Minister’s primary position that Mr. Uppal beneficially owned all of the shares. However, that position could be pleaded elsewhere in the Notice of Reply but not specifically as assumptions of fact relied upon by the Minister during the assessment process.
The motion judge further states at para. 10:
I can only strike the relevant paragraphs if I am satisfied that one of the factors in subsection 53(1) of the Tax Court of Canada Rules (General Procedure) has been met. In [Canada v. Preston, 2023 FCA 178], the Court emphasized that a motion to strike that involved simply moving an inappropriate assumption to some other part of the Reply should not be granted if the taxpayer knew the case to be met and would suffer no prejudice from leaving the paragraphs as they were.
In Uppal. the motion judge found that the Appellant would suffer real prejudice for two reasons;
1. The competing assumptions produced different tax outcomes for the Appellant. If Mr. Uppal beneficially owned the shares, he could potentially reduce his income by the cost of acquiring the shares and, if the shares were held on capital account, be taxed only on the taxable capital gain. By contrast, if Chambord beneficially owned the shares and Mr. Uppal appropriated the proceeds, he could be taxed on the full proceeds.
2. The prejudice was heightened because the appellant was an estate. The rationale for the reverse onus on Ministerial assumptions is that taxpayers generally know their own affairs better than the Minister. That rationale is weaker where the taxpayer has died and the person with the best knowledge of the relevant facts is no longer available to testify. In those circumstances, it was particularly important that the Estate know precisely which assumptions it had to meet.
Accordingly, the motion judge struck the respective pleadings with leave to amend.
Alternative Penalties
As for the new penalties, the Minister argued that the T1134/T1135 penalties are alternative bases of assessment and that subsections 152(9) and 171(1) of the ITA permits the Minister to rely on them. According to the latter, the TCC can either allow the appeal in full, dismiss or vary the assessment and/or refer it back tot he Minister for reconsideration and reassessment. However, the TCC ruled that subsection 171(1) did not give the court the power to refer the assessment back to the Minister on the basis previously unassessed penalties should be assessed.
Accordingly, subsection 152(9) of the ITA only permits the Minister to advance an alternative basis or argument in support of an assessment, but it does not authorize TCC to impose new penalties. As the T1134/T1135 penalties had nothing to do with the assessed gross negligence penalties, the TCC struck the new penalty pleadings.
SpenceDrake Tax Law – Tax Lawyers
Disclaimer
Each article/blog post is only meant to provide general information. It is posted on a specific date. Laws and rules change. Please know that it may be out of date. It is not meant to provide legal advice, and it does not provide legal advice. It cannot be relied on. Every tax situation is unique, and that may mean situations differ from this article/blog. If you have legal questions, please consult a lawyer.